Today’s Blog – Monday 8th May 2017

The current gas market woes on Australia’s East Coast are inducing new supply activities ranging from Floating Storage & Regasification Units (FSRUs), potential material new investment by Exxon and BHP in Gippsland – and various developments in the distant Northern Territory. The latter is subject to various political hostages to fortune, but it seems that some are prepared to take bets on their successful resolution.

Origin Energy (ORG) announced on Friday that it had entered into a deal to boost its equity in the Beetaloo Basin joint venture to 70% by buying out South African energy giant SASOL (the remaining partner is AIM listed Falcon Oil and Gas). The terms of the deal were not disclosed (one can get away with murder on the ASX it seems – the SEC for instance is a harder task master). However, the deal was said to be conditional – leading us to speculate that it may only close when or if certain outcomes are delivered from the current review into fracking in the NT.

ORG has been reported as potentially putting extra weight behind another pipeline link from the NT to the East Coast – from Alice Springs to Moomba (through – or around – some tough desert conditions). However, it could well be cheaper in the medium term to ship gas through existing pipelines to Darwin, liquefy it in the DLNG plant (where spare capacity will arise next decade) and then take it to an East Coast FSRU.

Jemena, the developer of the Northern Gas Pipeline from the NT to Mt Isa, is naturally not very keen on any new competitor – and demonstrated its mojo last week by talking up an extension from Mt Isa to Wallumbilla.

That would need extra gas though – and therefore all roads lead back to the NT Govt hopefully adopting a sane approach to fracking. However, the history of insanity on this front in Australian State and Territory jurisdictions gives one cause to expect some good ole can-kicking-down-the-road.

Commodity markets

Last week crude prices fell by ~6%, as Brent closed at US$49.10 and WTI at US$46.22. The main market dynamics are:

Frustration that measurable inventories are holding up – i.e. basically those in the US, which did not fall by as much as expected last week – crude down 0.9 mmbbls (or 2.4 if SPR sales are added), gasoline up by 0.2 mmbbls and distillate down by 0.6 mmbbls.

Ongoing rig count adds – with last week’s total up by 7 (6 oil, 2 gas, less one miscellaneous). This feeds the main fear – that OPEC cuts are not having their way due to the US shale oil patch ramping up production.

A geopolitical focus on the risks of material Libyan production being back on line (versus the possibility that Venezuelan production could fall of a cliff as the country collapses).

Fears that OPEC cuts might not be extended – as the Saudis get sick of carrying all the cheaters (including the non-OPEC Russians).

Henry hub was in comparison tranquil last week – closing where it started at US$3.27.

Company news – Santos (STO)

STO held its AGM last week and unfortunately your blogster wasted a few hours of his life listening to high level platitudes and activist investors focused on the company’s non-core and immaterial in value Narrabri project.

Some more interesting news came from the soon to be retired company Chairman – who flagged after the meeting that STO would now invite a representative from strategic Chinese investor, ENN, onto the Board.

When that happens it will be interesting to observe whether it translates into any changes in strategy that fit with ENN’s position as a large Chinese gas buyer.

Disruption

Maybe China will need even more gas for its electricity generation fleet in the medium and longer terms – as the country seems to be going down the road of mandating a growing amount of its vehicle fleet be electric. The history of the last 20 years would tend to support the Communist Party’s ability to deliver on such major policy moves.

Maybe less structurally certain of delivering, but still showing the same inclination, is India, with the following recent quote from its Power Minister:

“The idea is that by 2030, not a single petrol or diesel car should be sold in the country”.

Quote of the day

Woodstock for capitalists was held in its usual Omaha, Nebraska location over the weekend, as the annual Berkshire Hathaway AGM took place. As usual, the Warren and Charlie show delivered some good quotes, including:

“My back hurts but, by coming to these meetings, I want to show fellow shareholders they have another seven good years outta Warren.” – the 93 year old Munger on his youthful 86 year old companion